Question

Cardinal Company is considering a five-year project that would require a $2,750,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 18%. The project would provide net operating income in each of five years as follows: $ 2,849,000 1,122,000 1,727,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 752,000 550,000 1,302,000 425,000 $ Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table. 13. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 45%. What was the project's actual net present value? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest whole dollar amount.)

Also Answer 15. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 45%. What was the project’s actual simple rate of return?

Answer 1

Sales	2849000
Less: Variable cost	1282050
Contribution margin	1566950
Fixed cost	1302000
Net operating income	264950

13) Net present value = (264950+550000)*3.127 - 2750000 = -201651

15) Simple rate of return = 264950/2750000 = 9.63%